The implications of the child care cost crush for median household income and “shadow unemployment”

The other day I showed that there is compelling evidence that the primary reason for the long term decline in the Labor Force Participation Rate in the 25 – 54 age range is the increasing real cost of child care, coupled with stagnant to declining real wages in the lower paying jobs typically taken by the second earner in a two earner household.
Today I have a few more precise graphs, and discuss the implications for median household income and the issue of “shadow unemployment” or “missing workers.

First of all is a graph of the increase in the number of those aged 25-54 who are neither employed nor unemployed, but out of the labor force entirely:

Unfortunately this is not avaiable on FRED, but via the BLS, here are the number of people in that above group who tell the Census Bureau each month that they want a job now:

thie number of people aged 25-54 who told the Census Bureau that they were out of the labor force, but wanted a job now, peaked in 2011.
Subtracting the second number (second column below) from the first (first column below) gives us the number of people aged 25-54 who tell the Census Bureau they *don’t* want a job now (third column below):
1999: 17.5m 2.0m 15.5m
2011: 20.9m 3.0m 17.9m
2015: 22.4m 2.5m 19.5m
What I showed the other day is that the big reason for the increase in this last number is the cost of child care vs. wages, which over the long term has become increasingly onerous. Another piece of supporting evidence comes from the below chart in the 2014 Pew Research Center’s report on women in the job market:

The Pew study found that as of 2012 the vast majority — 85% — of stay at home married mothers say the reason for not working is to take care of their children. Note also that the number of women staying at home is much larger for age groups 25-54 than for those either young or older. The only thing not making this the ultimate “smoking gun” supporting the child care cost crunch thesis is that the study makes no comparison with 1999.

Implications for real median household income
Like the LFPR, real median household income has declined across most age cohorts since 2000. Here is a graph I have run a number of times, showing real median household income for various age groups (h/t Doug Short):

Aside from the unemployment rate, working age people dropping out of the labor force due to increasing child care costs is the most important reason for the failure of median household income to return to its level in 2000. After all, giving up a second income necessarily means that the household’s income is less than otherwise.Implications for “shadow unemployment”
Finally, here is a graph of what the Economic Policy Institute calls “missing workers:”

The EPI defines “missing workers” as

potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. In other words, these are people who wouldbe either working or looking for work if job opportunities were significantly stronger. Because jobless workers are only counted as unemployed if they are actively seeking work, these “missing workers” are not reflected in the unemployment rate.

Note that this has been rising since 2007, unlike virtually all other metrics.

I have been critical of this measure, which is based on projections from a 2006 Regional Fed study. The Census Bureau’s series “Not in Labor Force, Want a Job Now” measures exactly what the EPI claims to be calculating, and that peaked out about 4 years ago. To the point, parents who stay at home to raise their children and tell the Census Bureau month after month that they quite simplydon’t want a job now are not “missing” from the unemployment rate.
But since increased wages, especially for lower quintile jobs, change the equation for families considering whether to have the second spouse work, i.e., increased real wages should result in more spouses opting to work, the Center’s “missing workers” statistic, including its continued slow rise, makes perfect sense if we describe it not as those who have dropped out of the work force, but would return if the job market was strong, but rather as those who would return to work if wages were better.

The effects of the child care cost crush not only unravel the mystery of the decline in the prime working age Labor Force Participation Rate, but it is also the missing piece in the puzzle of the similar secular decline in real median household income, and the rise in “missing workers.” Once we include these effects, almost all of the mysteries in current labor market statistics disappear.

Comments (6)

Arne

August 21, 2015 7:30 pm

“working age people dropping out of the labor force … giving up a second income necessarily means that the household’s income is less than otherwise”

Would you not see the same even if child care costs were not rising? If there are two earners, it takes a better wages to get both of them into the job market. Perhaps especially if their expenses are lower because there are no kids.

The Rage

August 22, 2015 4:26 pm

This is garbage. Sorry, but don’t buy it. Better wages aren’t going to get them into “the job market”. If they need work, they will get into the job market. Most people don’t need child care

These people choose much like they chose in 1999(I know several people who say high on that one) not to enter the job market. The number is declining because the cohort has declined with the Baby Boomers leaving the cohort. Like wise, the 55+ age groups cohorts have gone through or especially the 60+ right now is going through acceleration. It is all demographics. Pure and simple. Let it go. The labor force is only growing 1% right now. That is being overwhelmed by retirements. Pure and simple. Lets don’t be stupid and dumb. The government explains “indexes” like “LFPR” and “EPOP” and describes them in very detail. Your medium wage growth is off as well. Your not adjusting for the lack of price inflation very well since 2009. The U-4 to the U-6 deal with “discouraged workers” and “underemployment” very well.

run75441

August 23, 2015 6:35 am

The Rage:

In particular, this post is about moms with children so to say “most people do not need child care” is off on another topic. The post is not about “most people” and is about moms or families with small children.

To answer your other statement on generally falling PR being the fault of baby boomers leaving the Labor Force : “Federal Reserve Bank of St. Louis data shows June of 2009 as the final month of the Great Recession, and a labor force participation rate of 82.9 percent for workers between the ages of 25 and 54. For June of 2015, the rate had fallen to 80.8 percent. The participation rate for all adults had averaged 66 percent or greater for each of the years from 1989 through the start of the 2008 recession, but has declined sharply since then. This morning’s report showed a rate of 62.6 percent, the 16th consecutive month of less than 63 percent participation and the longest such streak since 1976-78.” I would point out PR immediately after the 2001 recession in Oct/Nov 2001 was at 66.7% and the author of this article talks only of 66%. 7 tenths of 1% is still a significant reduction and not a part of baby-boomer retirement.

As I pointed out in another post by the author, Dr. Warren has also pointed out that families have become two earner supported due to the rising costs of entry into the American Dream of Middle Class/Income. It could be, the costs of which have finally surpassed the income producing abilities of those with families eligible to work. To support such a premise, there is plenty of evidence to support decreasing incomes since the late seventies which I deem not necessary to duplicate here. Indeed, it may make sense not to have the extra car (or transportation) for a woman to go to work from suburbia (city) or to bear the additional costs of clothing also.

Eric377

August 24, 2015 3:41 pm

Yes, there must be some people out there for whom purchased child care is too pricey to make much sense compared with the wage work they are considering. Is this a problem? I can’t tell from this if he thinks anything should change or merely this explains some data he has puzzled over.

Gone2Ground

August 25, 2015 4:07 pm

Is it not also possible that the “bulge” in the middle of ages 35 – 54 also consists of women caring for older relatives, even in addition to children? The cost of nursing home care is also hugely expensive and not always covered by insurance or Medicare. Medicaid takes all the family inheritance money as well in clawbacks.

run75441

August 26, 2015 8:55 pm

First post goes to moderation and then you can post as you wish. Thanks for joining us.